Congress helps build a floor under soybean oil prices

When it comes to the U.S. biofuel market, ethanol receives all the attention. To be sure, ethanol production and consumption dwarf the size of the biodiesel market.

Nevertheless, biodiesel was thrust into the limelight recently. The Jan. 1 deal passed by Congress to avoid the fiscal cliff included a provision to extend the $1-per gallon tax credit for companies that blend biodiesel with petroleum-based fuel through the end of 2013. In addition, the new legislation makes the extension retroactive to its December 2011 expiration.

Since biodiesel broke onto the scene in a meaningful way in the mid-2000s, approximately 10%-15% of U.S. soybean oil output has been used for biodiesel. Despite its relative low-profile status, soyoil-based biodiesel usage almost doubled in the 2011-12 marketing year from the previous year, to 4.87 billion pounds, from 2.73 billion pounds. The estimate for 2012-13 usage is slightly higher at 4.9 billion pounds. With smaller soybean crops over the past two seasons, the combination of lower bean oil supplies and the jump in consumption have caused a sharp drop in ending stocks.

From the 2005-06 marketing year through 2011-12, the advent of biodiesel did not affect the availability of soybean oil. U.S. ending stocks during that period averaged 14% of consumption. This year the estimate has fallen to 7.7% of usage. If the government’s tax breaks are successful in stimulating production and ultimately usage, we can see inventory levels strained further.